Gabelle Tax Analysis: First-tier Tribunal denies income tax relief for members of film partnership
The First-tier Tribunal has considered whether a film partnership, Eclipse Films Partners No 35 LLP (Eclipse), was carrying on a trade, and as a result whether sideways loss relief and relief for loan interest paid are available to the members of the LLP. The tribunal decision (Eclipse Film Partners No 35 LLP v Revenue & Customs TC01963) was published on 20 April 2012.
Eclipse was formed to acquire and exploit film rights, and in particular it became involved in the exploitation of two Disney films. Although the facts were complex - because of the complexity of the financial arrangements - the point at issue was simply whether the LLP was carrying on a trade in the year to 5 April 2007; if it was carrying on a trade, what trade was being carried on; and, was it being carried on with a view to profit?
The tribunal decided that the LLP’s activities were a business involving the exploitation of films, which did not amount to a trade. The activities of the LLP were held to be more in the nature of an investment in certain rights to income deriving from the exploitation of films, but this did not amount to a trading activity.
As there was no trade, the tribunal did not need to consider the two supplementary issues.
If Eclipse did not carry on a trade, sideways loss relief was not available. However, what was more important for the members of this LLP was the disallowance of loan interest which, by virtue of the financing agreement, was paid up front. Loan interest relief is available only where the loan is used to provide capital to a partnership which is used for the purposes of its trade.
This decision demonstrates the rigorousness of HMRC’s approach to disallowing loss relief and loan interest relief for film partnerships.
Anyone who has participated in such partnerships should expect HMRC to challenge the availability of income tax relief.